Look Out : There Is a Bankruptcy Storm Brewing in Europe

Two weeks ago we wrote about the first implementation in Europe of the Bank Recovery and Resolution Directive (BRRD), which allows dipping into bank accounts. Austria just implemented it for Hypo Alpe Adria: the bank had been nationalised in 2009 and had received a bailout of 5.5billion euros, but Vienna decided to stop putting money into it by putting the bank in liquidation. This translates into a net loss of 7.6billion euros for the creditors and, already, one of them has gone under: Germany’s Düsseldorfer Hypotherkenbank, known as Düsselhyp.

This small bank was very active on the Pfandbriefe (secured bonds that are very popular in Germany) market, worth 400billion euros. In order to avoid any risk of destabilisation, the Association of Private Banks (BdB) has decided to take control of the failing bank through its deposit security fund. It looks like the fire has been put out, at least for the moment, but let’s acknowledge, in passing, that the deposit security fund has been called upon even though this bank does not cater to individuals... is someone panicking?

Another warning comes from the small and discreet principality of Andorra: the U.S. Treasury has started to investigate the Andorra Private Bank (BPA) for money laundering and it could prohibit the bank from operating in the United States within 60 days. Immediately Andorra’s banking regulatory authority announced it would take full control of the BPA, while we learned that its 100%-owned branch, Banco Madrid, was filing for bankruptcy! This private bank manages 6billion euros worth of assets and has 15,000 clients in Spain, both private and institutional, holding at least 500,000 euros each in their account... At first glance, it seems those clients are going to lose everything, and it is catastrophic.

BPA has a 3.1billion euro balance sheet, close to Andorra’s GDP (3.5B). The banking sector accounts grossly for six times the little alpine country’s GDP. And there is another problem: Andorra is using the euro... but it is not part of the Euro zone; so it cannot rely on the ECB and its financing facilities. Banks can only be bailed out with Andorra’s state budget; in other words bankruptcies are looming for banks and the country, and we know the kind of repercussions that come with this outlook. Perhaps François Hollande, since he’s actually a co-prince of Andorra, will find a solution...

And let’s not forget the Greek banks riding horses toward the cliffs: Greece is financing itself by issuing short-term Treasury bonds that banks are buying back (they have no choice). For that purpose, they are financed by the ECB’s Emergency Liquidity Assistance (ELA) mechanism. The European central bank is thus engaged to the tune of 60billion euros toward these de facto insolvent banks. The depositors, for their part, are withdrawing their savings at full speed because they anticipate bankruptcies. The fall may occur soon, unless Europe winds up for yet another bailout plan...

The media silence should be noted regarding those bankruptcies in Austria, Germany, Andorra (always coming with the risk of contagion) and maybe Greece... I guess the European savers cannot be alarmed!

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Philippe HerlinFinance Researcher / Member of the Goldbroker.com Editorial Team

Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.